Essential Aspects You Should Know About Auto Dealer Surety Bonds
As an auto dealer, you might wonder what a surety bond is and why your clients prefer this so-called risk management tool when filing claims for their damages.
Consider a scenario where you fail to perform your duties ethically towards your customers. That’s when a surety bond provides the payments to them while adhering to their requirements. In some cases, another hired contractor can do your work, as per the clauses mentioned in the guarantee contracts.
Now that you know when these bonds step in, here are some essential aspects of the auto dealer surety bonds you should know. It will help you prepare yourself better when facing such situations in your thriving business in the automobile industry.
With more people interested in purchasing new model vehicles, the industry dealing with car buying and selling faces increased illegal practices. In most cases, the auto dealers get accused.
When you have such a business, where you buy and sell automobiles, you will have to obtain an auto dealer surety bond before earning your license to sell.
Depending on your type of dealership, you might have to file one of several bond categories, such as:
- Used car dealer bonds
- Wholesale car dealer bonds
- DMV bonds
- RV bonds
Ultimately, all have the same motive, to protect the customers from potential fraudulent activities, and guarantee that you will work according to local or state regulations. It provides your auto business a symbol of authenticity.
Typically, when an auto dealer surety bond comes into the picture, there are three parties involved, the principal, obligee and surety.
If you are the auto dealer, you would be the principal needing the surety bond coverage. The obligee is the individual requiring the bond, as per the state where you plan to establish your dealership. And the surety is the party that provides the financial guarantee to the obligee that you, as the principal, would be capable of fulfilling your obligation.
You will work with the other two parties, ensuring you don’t conduct unethical business practices. The surety bonds will help the crossed party make rightful claims and receive deserving compensations from the surety firm.
Some general illegal activities are connected to motor vehicle dealers, including cheating while financing and providing false information while selling a car.
When you sell a stolen car, fail to pay the purchased warranty or fail to provide a valid title, they also count as deceiving your clients.
If your customer suspects you of not being responsible enough or breaking the state laws, they are entitled to file a claim on the bond.
The surety bond company will evaluate the situation and check for any malpractices. And if they find any, they will pay the remunerations to compensate the customer’s losses. You will have to reimburse the surety firm for their expenses later.
Each state requires the dealer bonds to cover a certain amount, called the bond penalty. The estimated premium for a surety bond is a percentage of the bond amount, between 1-5%, the value varying with your credit score. If you have credit challenges, the rate could be as high as 10-20%.
As evident, your credit score is the most crucial aspect determining the premium you would have to pay to obtain a surety bond. The score helps the surety to assess your repaying capacity and confirm if you will operate ethically, making claims less likely in the first place.
First, understand your credit score and try improving it. Then organize your business financials; focus on increasing your assets and reducing your liabilities.
Work ethically; your clean portfolio can help minimize the claims. However, if you face an unavoidable claim situation, choose the right surety agency to get the best-fit auto dealer surety bond for your business.
Look for agencies that write auto dealer surety bonds countrywide, providing the best quotes, whether you have a good or bad credit score. Check if they have a sophisticated processing system and highly competent staff on board, ensuring quick turnarounds.
Ensure these services work with many markets and are capable of approving your request, even if you wouldn’t qualify for a surety bond in the conventional systems.
Confirm if they accept an online application and are easily reachable, making the process less complicated.
An auto dealer surety bond is a legally binding contract and a must for opening a dealership. Hence, check your state requirements and accordingly purchase the right type of surety bonds. Rest assured, with a clean financial history and an excellent reputation; you can peacefully run your secure automobile business.